The Tax Court held that payments a taxpayer made to a former spouse were child support and not spousal support, since the divorce instrument under which they were made contained a child-related contingency under former Sec. 71(c)(2)(A). As a result, the Tax Court agreed with the IRS that the payments were nondeductible.
Note: The divorce instrument in this case was executed prior to Jan. 1, 2019; therefore, the provisions of former Secs. 71 and 215 applied. For any divorce decree taking effect after Dec. 31, 2018, these provisions have been repealed by Section 11051 of the law known as the Tax Cuts and Jobs Act, P.L. 115-97.
Facts: Alejandro and Cristina Rojas were married in 1995. They separated in 2010, with a divorce entered by a California state court in 2012. As part of the judgment, the court attached a stipulation that neither spouse was obligated to provide child or spousal support. However, the judgment required Alejandro to pay Cristina $4,500 per month in “family support” until both their minor children became emancipated or she remarried. If Cristina did remarry, the payments would be reduced to $2,500 until their children became emancipated.
In 2013, Alejandro filed a request for an order with the court seeking a modification of his child support payments. Cristina argued that there was “no current child support order in place,” which the court agreed with.
In 2016, the tax year in question, Alejandro made equal monthly payments to Cristina of $5,824, totaling $69,888. Alejandro and his new spouse filed a joint individual tax return for 2016 claiming a deduction of $69,880 for the payments as alimony. The IRS disallowed the deduction and determined a $24,458 deficiency on the return, and Alejandro and his new spouse petitioned the Tax Court.
Issues: The IRS accepted that the payments met the definition of alimony or separate maintenance payments under former Sec. 71(b)(1). However, the Service contended that a deduction for the payments was unavailable because the divorce instrument under which they were paid contained a child-related contingency under former Sec. 71(c)(2)(A), specifically, the children’s emancipation.
For any divorce instrument that took effect on or before Dec. 31, 2018, spousal support paid to a former spouse is includible in the recipient spouse’s gross income (former Sec. 71(a)) and allowed as a deduction to the payee spouse if it is included in the gross income of the recipient spouse (former Sec. 215(b)). If the payment constitutes child support, no deduction is available to the payee spouse (former Sec. 71(c)(1)). Also, any amount specified in the divorce instrument that relates to the happening of a contingency with respect to a child will be deemed child support or be reclassified as child, and not spousal, support (former Secs. 71(c)(1) and (2)). These contingencies include “attaining a specified age, marrying, dying, leaving school, or a similar contingency” (former Sec. 71(c)(2)(A)). Temp. Regs. Sec. 1.71-1T(c), Q&A-17, adds to these examples attaining a specified income level, leaving the spouse’s household, or gaining employment.
California state law deems a child to be emancipated if “one of the following requirements are met: (1) appointment of a guardian of the person; (2) marriage; (3) attainment of majority; (4) active duty with the armed forces of the United States; or (5) receipt of a declaration of emancipation under the Emancipation of Minors Law” (Witkin, Summary of California Law, Chapter XIV, §356 (11th ed. 2021)).
The taxpayers claimed that former Sec. 71(c)(2)(A) did not apply to the family support provision of the divorce instrument, since the payment constituted a “mixed contingency” between spousal and child support. Alternatively, they asserted that the federal Full Faith and Credit Act, 28 U.S.C. Section 1738, precluded the Tax Court from reclassifying the spousal support to child support, since the state court had stated that “there is no current child support order.”
Finally, the taxpayers contended that it was inequitable to treat the payments as nondeductible child support, since the order issued by the state court had deemed the payments were not child support.
Holding: The Tax Court held that the child-related contingency in the divorce instrument triggered the application of former Secs. 71(c)(1) and (2)(A), thereby making the payments excludable from Cristina’s gross income and not deductible from the taxpayers’ gross income.
With respect to the taxpayers’ argument that the divorce instrument’s “mixed contingency” made the provisions inapplicable, the court reasoned that former Sec. 71(c)(2)(A) is triggered without regard to any other contingencies within the divorce instrument, citing Biddle, T.C. Memo. 2020-39; Hammond, T.C. Memo. 1998-53; and Fosberg, T.C. Memo. 1992-713.
As for the taxpayers’ invocation of the Full Faith and Credit Act, the court concluded that argument was misplaced. The court said that the state court’s order merely reflected that the payment was a family support payment, which under California law is an unallocated payment of both child and spousal support. Furthermore, federal law and not state law governed the payments’ federal deductibility or nondeducibility, the court said, citing Bardwell, 318 F.2d 786 (10th Cir. 1963).
The Tax Court similarly denied the taxpayers’ equitability argument, noting that in an analogous case, Paxman, 50 T.C. 567 (1968), aff ’d, 414 F.2d 265 (10th Cir. 1969), it had stated that “not only is the Tax Court not a court of equity but [taxpayers], in effect, are asking us to legislate changes in the statute as enacted by Congress.”
The Tax Court thus concluded that the payments by Alejandro to Cristina were nondeductible child support payments and upheld the deficiency.
■ Rojas, T.C. Memo. 2022-77
— John McKinley, CPA, CGMA, J.D., LL.M., is a professor of the practice in accounting and taxation in the SC Johnson College of Business, and Matthew Geiszler, Ph.D., is a lecturer in accounting in the College of Human Ecology, both at Cornell University in Ithaca, N.Y. To comment on this column, contact Paul Bonner, the JofA’s tax editor.
